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The man who runs Round Rock Research, the NPE that bought 4,000 patents from Micron Technologies in autumn 2009 and is now busy monetising them, has revealed that the company approached him to do the deal. Speaking at the IPBC yesterday, John Desmarais explained that he had had a long relationship with Micron, which he had represented on a number of occasions as outside legal counsel, and that it had been their idea to sell him over 20% of its patent portfolio. It took time to be convinced, he stated, but as discussions continued, the size of the asset and the opportunity that it represented became increasingly intriguing and so in the end the deal was done. Although he did not say it outright, it also looks as if this was a big deal financed by major financial institutions and that Micron has no on-going interest in the portfolio – apart from the licence it has to use it – and does not get a significant share of the sums that Round Rock is now generating; in fact, it may even get nothing at all.
Desmarais was a member of the panel for the Developing NPE market breakout that took place at the IPBC yesterday afternoon and he said that he expected a number of other large corporations to follow Micron’s example over the coming months and years. Indeed, he stated, since the Round Rock deal became public he is approached on almost a weekly basis by companies “trying to give me parts of their portfolios”.
Creating entities based on large, high quality patent assets, Desmarais explained, creates a compelling licensing story as it is difficult to counterclaim against an NPE and high quality patents are going to be hard to invalidate. As part of a larger portfolio owned by an operating company that equation changes as the patents are easier to attack, because counterclaiming becomes possible. The value of the portfolio, therefore, is much lower.
What's more, for as long as you own patents you are responsible for their management. That is expensive. Desmarais said that 27 firms were responsible for prosecuting the portfolio Round Rock acquired from Micron (he very quickly reduced this to two) and that, in addition, there were maintenance fees and annuities to be paid. “It is a huge investment to keep these assets,” he said. “They cost millions to maintain, but the longer you own them and do nothing with them, the less valuable they become.” Companies do not need thousands of patents to ensure their defensive positions, so it makes sense to keep hold of what is strategically important and to sell everything else. This makes money and gets a significant expense of the books.
However, in order for any sale to be effective it is important that the NPE acquiring the patents is completely independent. “There should be no ties and no control,” Desmarais said, adding that Round Rock makes all its own decisions. If there is an on-going link between the seller and the buyer, this may leave the seller vulnerable to attack from companies subsequently approached to take licences. As for getting hold of the funds necessary to purchase large, high-quality patent portfolios, Desmarais said that if the portfolio was right this would not be a problem. “You can put together any deal that you want to,” he stated.
Desmarais also explained how he got involved in offering covenants not to sue (CNS) at the most recent ICAP Ocean Tomo auction. Apparently, the company had approached him soon after the purchase of the Micron portfolio to see if he would be interested in selling some of the patents at the auction. He was not. But ICAP OT wanted to get Round Rock involved in some way and came up with the CNS idea. The company’s CEO (Dean Becker) is a persuasive salesman, Desmarais said, and so he eventually decided to take part, not expecting that anything would actually sell. But, as we know, one CNS went for $35 million and there were big bids on most of the others. However, that does not necessarily mean that Round Rock will take part in future auctions. Given the costs involved there would need to be compelling reasons, Desmarais stated.
All in all Desmarais provided plenty of food for thought, including:
• Round Rock bought the Micron portfolio in autumn 2009. Desmarais said it had taken a while to persuade him to do the deal. He would also have needed to raise the cash and do the due diligence. Six months prior to the deal being done, the CEO of Micron was telling Congress all about how wicked NPEs are. It looks possible, even probable, that at the very time he was doing this his company was involved in planning and/or negotiating the creation of an NPE.
• Micron has never officially announced the sale of the portfolio to its investors – either as a material event or in a press release. We know that since the sale took place Round Rock has done a lot of big deals with the patents. One CNS alone raised $35 million. It’s not unreasonable to think that hundreds of millions of dollars in total have been raised. From what Desmarais was saying, it seems pretty clear that Micron does not get a big share of the deals Round Rock does, or maybe does not get anything at all. If I were a Micron shareholder I would want to make sure that the sale raised a reasonable amount – notwithstanding the savings the company makes by no longer having to worry about the portfolio and the fact that Micron probably could not have monetised the patents as effectively as Round Rock can. Yet investors do not seem to be interested. On that basis, IP surely has a way to travel before it is a generally recognised asset class.
• Finally, if Micron has done it, you can bet your bottom dollar that other companies have done so too, or are about to. The IP transactions market in the US, and perhaps elsewhere, could be on the verge of quite a big change.
Licensing, Patents, IP business